The European crisis: a hurricane for South Africa | by Amandla! editorial staff

by Feb 14, 2012Magazine

The economic storm triggered by the 2008 financial crash in the USA and Europe led to the loss of more than one million jobs in South Africa. Today we know that the crisis never really abated.
How could it? Claims for hefty profits, wheedled through strange and complex chains of debts, were never cancelled – they were shifted, along with private debts, onto governments and their public sectors.
In the US, banks were bailed out with borrowed money and money that was newly created by the central bank. But this latter option is not really possible for other countries, which don’t enjoy the status of the dollar as international reserve currency. In the European Union (EU), failing banks paid off creditors with government-sponsored funds in turn borrowed from new creditors − in the form of loan contracts called bonds.
Paying old loans with new
Since then, these new loans have, with compound interest, continued to grow as claims on the governments. This process is snowballing, with EU governments first taking new loans to pay off the old, then taking new loans just to pay the interests on old loans, and then not paying at all when new creditors demand higher and higher interest rates. EU governments with the weakest flow of tax revenues – like Greece – are succumbing to these snowballing demands for payment. The EU then steps in to force austerity, making the public sector pay for the rescue of the banksters.

Consequently, Part Two of the global economic crisis has arrived. Countries in EU are cutting back on everything to pay ‘our debts’ in general, but in particular to save the Euro as the common currency of EU.

Drop in SA exports
With the turmoil in Greece triggered by the EU’s decision to impose a giant austerity package on the country, the Euro is mortally wounded. Public sector wages in Greece have already been cut by a third. New state bankruptcies are in the pipeline, starting with Italy –  the tenth largest economy in the world. In the middle of November, the interest rates on Italian state bonds were reaching the magic 7% limit. So far, no state in the EU has endured such high interest rates on its debt without a bailout. Next up are the indebted governments of Portugal and Spain, as nervous and profit hungry creditors and private banks demand higher interest rates on state bonds they own. Even France is now in the firing line of the financial speculators.

Close to one third of South Africa’s exports (30%) goes to the 27 member states of EU. When the Euro falls in value, when wage cuts and austerity hit the working population and when public spending is increasingly redirected to the coffers of the financial elite and insatiable for-profit institutions: there will be a massive drop in SA export sales to Europe.

As Amandla! has argued before: South Africa is in for a hurricane as global capitalism limps from crisis to crisis. The ‘export-led growth path’ has failed and will continue to fail. Without a change in policy, South Africa’s mass unemployment will only grow bigger in 2012.

An Amandla! economic policy brief
The ANC government’s economic policy subsumes the country’s internal mass unemployment disaster to South Africa’s external relations with global capital.

The coming crisis must be used to do the opposite. It must be used to turn this policy around and subsume the country’s relations with foreign interests (investors, the WTO, the World Bank and the global economy) to SA’s internal economic situation. The pressing needs for a steep increase in employment, social investments, and broad-based working-class consumption must take priority over foreign economic interests. Such a turnaround can only be led by the public sector.

Holding on to GEAR
This makes imperative an increase in taxes, disproportionately drawing on the incomes and wealth of big corporations and the rich. And for this it is necessary to lift the unofficial tax revenue cap, first spelt out in the 1997 GEAR policy document.

Budget decisions and outcomes show that the cap was already firmly in place in 1994. It fell off or was lifted from 2006 to 2009. But as can be seen in Treasury’s October 2011 MTBPS, the government has returned to the policy of pegging the total revenue from all forms of taxes at ‘25% of GDP’.

A 25% of GDP tax cap limits SA to a public sector of the same size as the USA, relative to the private sector. America is well known for the meekness of its social spending and the sheer panic that taxes inflict on its ruling classes. Its unfair health system is divided between rich and poor, just as in SA. Alternatively, we could compare the South African tax regime with bankrupt Greece. The ‘25% of GDP’ rule lies 3–4 percentage points lower than tax revenue to GDP in Greece, a country now universally criticised for its inadequate tax revenues and inability to curb upper-class tax evasion.

The low tax rates in SA cannot be defended with the usual ‘too narrow tax base’ argument. The more unequal a society is, the narrower becomes its tax base, and the higher must be the tax rates on the top income earners and the middle class. The alternative is to accumulate state debt, which is precisely what the government is doing right now, at dangerous levels.

2010/2011 2011/2012 2011/2012 2012/2013
Outcome Budget Est. Outcome Budget
24.5% 24.9% 24.5% 24.6%

Table: Tax revenue as share of GDP (The Treasury’s 2011 Medium Term Budget Policy Statement and Amandla! calculations)

SA Treasury: joining the wage austerity choir
As expected, and despite the mounting global crisis, SA’s Treasury announced no fundamental shifts in economic policy in its Medium Term Budget Policy Statement (MTBPS). The policy rests on the assumption that private business will be the main creator of jobs. And Finance Minister Pravin Gordhan deems it necessary to repeat what no one else believes – that the economy eventually will start to grow by more than 6% per year.

Yet as the global crisis unfolds, the government defers its wildly optimistic predictions further and further into the future. The Treasury looks into the fog and predicts 4.3% growth by 2014, ‘as global uncertainty subsides and confidence strengthens’.

Yet in light of the impending stagnation or dissolution of the EU, the debt crisis and political gridlock in the US, the constantly increasing world oil prices based on resource depletion, the global failure to regulate speculative finance or halt accelerating climate change, the growing food crisis, the widening gap between rich and poor and the potential for a hard landing of the Chinese economy – everything points in the opposite direction.

The Treasury plan: attack public sector wages
But if the muddled thinking in the MTBPS is disturbing, far worse is the Treasury’s attack on the public sector wages, both because of the political timing and the threat it poses to economic recovery by slashing effective demand for consumer goods and services in a time of crisis.

The burgeoning labour broker industry, now comprising 30% of the job market, already compounds the problem by putting downward pressure on real wages with just-in-time employment and constant re-negotiation of wage agreements under conditions of hard competition for jobs. Added to this is a proposed youth wage subsidy allowing further cuts, and the 30% wage rebate deal for new employees in textile factories struck by SACTWU and the subsequent (next day!) demand from the National Employers Association of SA for a 50% cut in the minimum wages.

Finally, Treasury is saying that the ‘2012 Budget provides for a 5 per cent cost-of living adjustment for public-sector employees, implemented with effect from April each year’, also implying a wage contract over several years. The unclear adding of ‘a built-in pay progression of 1.5 per cent and improvements in overall remuneration’ doesn’t change the impression of a de facto wage freeze.

An impossible and harmful wage freeze

Firstly, when announcing this quasi wage freeze, the Finance Minister had to presume that consumer prices (inflation) will stabilise at 5.5% per year. This was already exceeded before the speech with a September Stats SA report citing a yearly inflation rate of 6.5–6.8% for 80% of the households, i.e. for a majority of the public sector employees.

Secondly, we cannot have different wage developments in the public and private sectors, without provoking flight from already heavily understaffed professions like teaching and health care. Therefore the message from the Treasury is a wage freeze signal to the whole labour market.

Thirdly, the Treasury’s presentation misleads the reader into believing that the wage increases for ordinary public employees have been excessive and this line has been mimicked by the business press. In fact, real growth in compensation for an average public employee has been less than 2.5% per year since 2007/08. This is 0.5% below overall productivity growth and 1.1% below private sector productivity growth, which is the more relevant measure. It is the private sector that pays for the public through taxes. The MTBPS decries the growth of wages as a proportion of state revenue (’42 percent up … up from 31 percent four years ago’). But looking at it purely in these terms is irrelevant – what counts is the wage increase for individual workers (a modest average of 2.5%) – and it is spurious – it fails to account for reductions in state revenue as a result of the crisis. Even with frozen public sector wages and frozen number of employees during these years, the public wage bill would have grown from 31 to 34.4 per cent of total revenue! Spending from the additional employees helped lift the economy out of recession by holding up demand when it was being drained by private sector layoffs.

A progressive government ought to understand that affluence, super profits and high incomes in the private economy should be taxed at a rate and scope that make it possible for public services to expand at least as the same rate as everything else.

Saved 2009 by the public sector
Just as for the private sector, elite wages to state officials are a huge problem, but it is irrelevant and politically biased to say that it is a problem that ‘public-service remuneration and increases in employment have raised the wage bill to about 42 per cent of government revenue, up from 31 per cent four years ago’. As said above, the average wage increases were 2.5% per year. The number of employees grew by 4% per year since 2007. That is all there is to it, and it was precisely the economic demand created by this public sector growth that saved the economy from collapsing completely in 2009.

Dangerous debt the real reason
Public sector employment growth isn’t just good for the economy in terms of upholding demand for goods and services in a time of crisis (as in 2009), it is also good for the people if the expansion takes place in areas like health, education or − as this magazine argues − in the form of one million climate jobs, rather than as excessive administration or bureaucracy. Just like capital investment, labour should go toward socially useful ends like building housing instead of giant coal power stations.

Projects of the latter kind now force the state to borrow hundreds of billions of rand every year. In October, the credit rating institute Moody’s downgraded SA’s credit rating to ‘negative outlook’. This will mean higher interest rates for state bonds, following the same logic as in Europe. The growing debt and the fact that interest payments on this debt next year will exceed a staggering R100 billion per year are the real reasons for the Treasury targeting public sector wages.

Health and education are investments

The Treasury describes its wage-curbing plans as a shift from public consumption to investment. But with 11% of the population infected by HIV and a massive education crisis, public spending on wages and the staffing of health and education is not ‘consumption’, it is an investment in the future. If the R1.5 trillion megalomaniacal plans for dirty and dangerous coal and nuclear energy production were shifted to wind and solar and scaled down to fit real needs for electricity; and if tax revenues were allowed to go above 25% as a share of GDP (see previous article), South Africa would be better prepared to confront the upcoming crisis.

Thus the obvious alternatives to borrowing more and attacking wages are increased taxation and reconsidering investment plans. But instead of announcing tax increases − which affluent households should expect without blinking in this situation, and which was also predicted by Business Report (24/10) − Pravin Gordhan and the Treasury have remained completely silent on the issue.

Protecting the rich

A table in the MTBPS indicates 11–15% increases in revenue from income tax, corporate tax and VAT. This is a result of the Treasury’s deluded predictions that economic growth will accelerate again, not of a change in tax rates.

But the most egregious Treasury plan is the 32% drop in tax revenue from taxes on dividends − i.e. the tax on the income from stock market investments, called STC. According to the OECD (2010), these incomes comprise more than 10% of the total income of the richest ten percent of SA households. The overwhelming majority have no such incomes!

A new wave of economic crisis is coming. If the Treasury has it its way, the richest households will be completely protected from its repercussions instead of contributing to its mitigation.

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